[timob1973]

I apologize upfront for the length of the post. But I want to make sure that all the facts are known.

We engage in indirect lending with several local car dealerships. The dealer will pull credit at their shop and then put the application into a system in which several lenders can look at the application to see if they would like the loan. At this point, credit is run again (this time by the lender)and there are essentially two different credit reports. I’ve been told that the dealership is providing a Risk Based Pricing Notice for their credit pull.

When I was reviewing indirect loan files, I noticed that the risk based pricing notice provided by the dealer did not match the information from our “the lenders” credit report. Differences included credit score, score range, percentile ranking, etc.

If the lender approves the loan, the dealer is free to write the loan according to our conditions (i.e. term, rate, etc). Assuming that the loan is accepted and closed, the dealer is responsible for all the paperwork, but the note is automatically transferred at closing. This means that the borrower knows that their loan payments will be made at the Bank and not the dealership.

I know that Regulation V states that a Bank that subsequently purchases an indirect loan is not responsible for the notice. However, in this case I believe that the Bank is generally controlling the underwriting.

I also think there is an issue that if the dealer is providing the risk based pricing notice and it really doesn’t reflect how we underwrote the loan (i.e. the dealer’s credit report has a credit score of 720 while the credit report we use had a credit score of 695). I believe an examiner could easily raise UDAAP issues.

So I guess here are my questions:

1. Who is responsible for sending the risk based pricing notice under this practice?
2. Do we have an UDAAP concern if the disclosure provided does not truly reflect what the Bank used to price the loan?

Your help is greatly appreciated.

[rcooper]

I don’t have much experience with this feature, but I agree with you that disclosures would need to be provided prior to activating the product so you have documentation that the customer was clearly informed prior to acceptance of the feature.

In regards to the OD fee, I do have concern with applying an OD fee because of this product. It seems to result in the opposite effect of what the bank is promoting which is “saving”. In an effort to avoid a UDAP issue, at the least I think this would have to be very clearly disclosed before implementation, as I mentioned above. Even with clear disclosures, which could eliminate the deceptive prong of UDAP/UDAAP it could still result in being unfair or abusive if not handled properly. Is there a way to set up the feature so it wouldn’t roll funds up if the round up would result in a negative balance?

I think your best approach would be to walk through this with your regulator before you get too far into the process. They’ll be able to advise you on what your best practices should be and what they will expect to see.

[rcooper]

Yes, you’re exactly right! As with any lending decision/policy you want to consider fair lending and across the board UDAP/UDAAP is always a factor. I would ensure there is a policy in place for this rather than lenders making this decision on an individual basis. You would want to consistently and fairly apply pre-payment penalties according your vetted policy in order to avoid disparate treatment or impact. And you would want to ensure any fee is clearly disclosed (and when it will be applied) in a way that is easily understood.

[kmeade]

What about Fair Lending and UDAAP issues, since no other commercial customers have pre-payment penalties? The loan will be in a corporation’s name.

[TheBank]

IF the bank provides an LE, the LE has been received by the customer in the mail, the LE expires, and no intent to proceed has been received, would it be correct to say that any fee then at that point could be increased because there would be no tolerance set point/no fees to adhere to at that point? In other words, we could then provide a revised/2nd LE with potentially all new fees because the first one expired?

If yes, then is there a requirement or expectation for the lenders to educate the consumer on the expiration of the LE?

Is there an issue if ITPs are frequently given late in the process? Is there a requirement or expectation of TRID/UDAAP that the ITPs should be obtained closer to the receipt of the LE?

We have had an issue with a lender not getting ITPs very timely, and in some cases this has benefitted the bank because the LE expired. What risk do we have here?

[rcooper]

I agree with your thoughts about this being a fair lending issue. I assume the concern is that the current arrangement of no expenses may not last forever; however, I don’t think it would be wise to add potential expenses that the borrower is not incurring because it is not an accurate representation of the applicant’s commitments/expenses, you do not when/how much potential future expenses would be, and the process could have fair lending implications. I think this practice could be viewed as intentionally trying to disqualify certain borrowers or it could be viewed as an innocent policy that may have a disparate impact on people of a protected class. Are there certain applicants (minorities, specific religion, or specific age, etc.) who are be more likely to live at home or in a multi-family living arrangement where they might not incur expenses? Could this practice be deemed that you are intentionally/overtly discriminating against these groups? Or if this policy seems like a justifiable business practice on the surface, to protect the bank, could it have a similar disparate impact on a protected class of consumers?

UDAAP is an underlying concern for many things; I think this practice could have potential unfair treatment concerns.

[timob1973]

If an applicant notes that they do not have any related living costs (doesn’t pay rent, lives with parents, etc), can a bank arbitrarily (but uniformly when applicable) assess a certain dollar amount related to housing expenses to determine a borrower’s ability to repay a loan? For instance, a borrower comes into apply for a small car loan. The borrower is currently living with their parents and does not have any housing expenses. And let’s say that the borrower has no other credit obligations. Can the bank (as policy) add a determined housing expense when calculating ability to repay even though that expense is not an actual expense?

Even if the bank applies this policy consistently, it does not seem like a good practice to add an expense to the borrower when the expense is not an actual expense. Additionally, I could see potential UDAAP concerns with the policy.

Any help would be appreciated.

[timob1973]

Here are the facts:

John Doe has a first mortgage with ABC Bank on his principle dwelling. John comes into the Bank to refinance his loan to get a lower rate. Loan officer and borrower decide that the Secondary Market option is the best way to refinance the debt. The Secondary Market lender is responsible for approving/denying the loan application. Once the loan is approved, the loan will close in ABC’s name (table funded) and then subsequently sold to the Secondary Market lender (within a few days…the loan is sold individually and not as part of a group of loans). No new money is being advanced.

Is the refinancing subject to rescission?

If the loan is not subject to rescission but rescission documents were provided to the borrower at closing and the rescission was not honored (i.e. funds were disbursed prior to the rescission period ending), is this an issue (potentially UDAAP and or TILA)?

Your help is greatly appreciated!!

[rcooper]

It sounds like you are already looking to the Regulation Z advertising rules, including the marketing rules related to college students in 1026.57, and the marketing/opt-out rules related to Reg P and FCRA. You will also need to consider UDAAP and CAN-SPAM. UDAAP affects everything you do and CAN-SPAM relates to email advertisements. You can find information about it on the FTC’s website at: https://www.ftc.gov/tips-advice/business-center/guidance/can-spam-act-compliance-guide-business and https://www.ftc.gov/enforcement/rules/rulemaking-regulatory-reform-proceedings/can-spam-rule

If you have specific questions once you’ve reviewed these requirements please let us know.

[amberb]

We use a third party to monitor fraudulent debit card transactions. If fraud is flagged, they will then contact our customer to confirm. Only transactions that were flagged are reviewed with the customer. Once the customer confirms fraud, they turn off the card, & ask the customer to contact the bank to file a dispute. The third party will also email the bank if fraud is confirmed. The customer doesn’t always call the bank to file a dispute & the bank has to reach out. Our question is, does the date of investigation begin the date that the customer confirms fraud with our third party provier or when the customer contacts the bank to file the dispute or when the bank contacts the customer? Also, we are concerned from a UDAAP perspective that the customer may be unclear they aren’t speaking to the bank when talking with our third party provider & may assume they are doing their part of the process. Is this a valid concern from a UDAAP perspective since it may be unclear to the customer?

[rcooper]

This would not seem to violate the federal anti-tying provision of Regulation Y (https://www.newyorkfed.org/banking/circulars/11230.html) as it would meet the “traditional bank product” exception. As to whether it would be a considered unfair under UDAP/UDAAP you would have to look at the definition/criteria of “unfair” – and I would suggest to also evaluate the product for “abusive” or “deceptive” triggers as well – and compare it to your product (along with associated processes, disclosures, verbal communication, advertisements, etc.) to avoid potential issues. Another potential issue you should consider is fair lending – could this policy have a disparate impact on certain protected groups (i.e. are minority groups less likely to have a checking account and therefore less likely to qualify for the product/favorable pricing because of this policy)?

[Anonymous]

Agree. We have already talked about UDAAP. Seven Day hold can only be used on my approval. It would be rare.

[jholzknecht]

The flood regulations apply when a loan is secured by a building or a mobile home. As mentioned your loan is not secured by either. There does not appear to be any flood insurance concerns and you have the UDAAP concerns covered.

The operator may have UDAAP concerns if pads in the flood zone are leased without notice of the risk.

[donblaine]

Great question.

The relevant Commentary in Reg DD states that “banks offering a grace period on CDs that automatically renew need not state whether interest will be paid if the funds are withdrawn during the grace period. Most banks handle this situation by disclosing in their initial disclosures: “If you close your CD during the grace period, accrued and unpaid interest will not be paid”

Unfortunately, the Commentary didn’t provide any clarity regarding payment of interest during the 10-day (for your bank) grace period if the funds were NOT withdrawn and did roll-over. There seems to be different practices among banks as to whether they pay interest or not during the grace period on accounts that are rolled over.

Payment of interest during the grace period would likely relate back to language, if any, you might have in your Agreement with your CD customer. The catch-all requirement in Reg DD is that account disclosures be: “reflective of the terms of the legal obligation of the account agreement between the consumer and the depository institution.” If your Agreement say says you will pay interest during any grace period you have to disclose this, and pay interest, but if the Agreement doesn’t address the issue then no disclosure and no payment of interest during the grace period is required. My guess is that your Agreement and disclosures indicate that interest will cease to accrue at the end of the original maturity date.

However, your main question dealt with UDAAP concerns regarding risk of not disclosing that interest will not be paid during the grace period. You also queried whether any potential risk could be mitigated by the payment of interest during the grace period. Both are good questions.

Rule #1 from Reg DD is that the disclosures be clear and conspicuous and reflect the legal obligation between the parties. My guess is that you currently meet that standard.

I do not think the issue of non payment paying interest during a grace period, when neither the bank’s Agreement nor its disclosures called for the payment of such interest, would meet the Unfairness standard of UDAP which is an act which causes or is likely to cause substantial injury to consumers, which is not reasonably avoidable by consumers themselves and is not outweighed by countervailing benefits to consumers or to competition. Neither do I think it meets the Deceptive test regarding a representation, omission or practice that mislead, or be likely to mislead, a reasonable consumer or is material in nature.

While I believe there are is minimal UDAP (I didn’t address the Abusive standard in the full UDAAP since that standard technically is applied to banks with greater than $10B in assets) risk in this situation, risk is usually lowered when a bank’s actions, such as paying interest when it isn’t required to such as during a grace period, are in the customers favor.

If your bank does decide to pay interest during the grace period, I would align my bank’s Agreement and account disclosures with this practice.

[rcooper]

Below are laws/regulations with training requirements. Keep in mind that examiners will expect to see training on other high risk areas (fair lending, UDAAP, etc.) not on this list as well as areas where your financial institution might need specific training due to audit findings, new products, etc.

BSA/AML:
12 CFR 21.21(c)(4);
12 CFR 208.63(c)(4);
12 CFR 326.8(c)(4);
12 CFR 748.2(c)(4)

Regulation CC: 12 CFR 229.19(f)

Bank Protection Act/Physical Security: 12 CFR 21.3(a)(3);
12 CFR 208.61(c)(1)(iii);
12 CFR 326.3(a)(3)

Information Security: Interagency Guidelines Establishing Information Security Standards III(c)(2)

FCRA/ID Theft Red Flags: 12 CFR 222.90(e)(3);
12 CFR 41.90(e)(3);
12 CFR 334.90(e)(3);
12 CFR 717.90(e)(3)

Reg Z/Loan Originator: 12 CFR 1026.36(f)(3)(iii)